The financial sector has become more “expensive” since deregulation, new study finds

Brussels, 18 June 2014 – Financial intermediation in Europe has become more expensive in recent decades, according to a study published today by the Institut des Politiques Publiques, a Paris-based research centre. The study was sponsored by Finance Watch, the public interest advocacy association.

  • Unit cost of financial intermediation has risen since the 1970s
  • Cost rises since 1990 cannot be explained by nominal interest rate changes
  • Study suggests a link with deregulation and securitisation

A policy note summarising the research is available here in English and French.

The study finds that, while the financial sector’s share of GDP has tripled since 1951, finance has also become more expensive on a cost-per-unit basis since the 1970s (comparing financial sector income with the volume of financial services produced).

The rises since 1990 cannot be explained by changes in nominal interest rates. The study’s author notes that this period coincides with the era of financial deregulation and produces evidence to link the cost increase with the development of securitisation.

Finance Watch’s Acting Secretary General Benoît Lallemand said:

“This study adds to the growing body of work on the costs of deregulation and financialisation. It tells us that, contrary to expectations, the growth of market-based finance since the 1990s has not reduced the unit cost of financial intermediation but has instead increased it.

“The findings should be of interest to policymakers searching for ways to make banking and finance serve the economy better.

“Previous studies have found that, after a certain point, financialisation acts as a drag on economic growth (a), and that effective financial regulation is a net benefit for society (b). The new study seems to strengthen both these findings.

“Finance Watch is happy to have supported this study, which builds on the ground-breaking work done in the US by Thomas Philippon (c) and extends it to Europe.”

For further information, or to interview Benoît Lallemand or the study’s author Guillaume Bazot, please contact:

Notes and references:

Bazot (2014), “Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950-2007),” PSE Working paper 2014 – 17 (WP as pdf) (data appendix)

A policy note summarising the research is available here in English and French.

(a) A June 2014 report from the European Systemic Risk Board includes a survey of literature on financialisation and concludes that:

“beyond a critical level of financial development, there is no association – or even a negative one – between financial development and economic growth.”

ESRB (June 2014), Reports of the Advisory Scientific Committee No. 4/June 2014 Is Europe Overbanked?

(b) A May 2014 report from the European Commission assesses the impact of the EU financial reform agenda and concludes that:

“The total benefits of the financial regulation agenda, if fully implemented, are expected to outweigh the costs.”

It also notes that:

“Many of the costs of the reforms are private costs to financial intermediaries that arise in the transition to a more stable financial system and are offset by wider economic and societal benefits.”

European Commission (15 May 2014), Staff working Document, SWD(2014) 158 final, “Economic Review of the Financial Regulation Agenda”

(c) Philippon, T. (2013): “Has the US Financial Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” WP.

Philippon, T. and A. Reshef (2012): “Wages and Human Capital in the US Financial Industry: 1906-2006,” Quarterly Journal of Economics, vol. 127(4).

Go to All press